Announcement to back away from replenishing U.S. Strategic Petroleum Reserves in February is a warning sign
When the U.S. Department of Energy (DOE) rejected the first batch of bids from oil companies to resupply a small amount of oil to replenish the depleted U.S. Strategic Petroleum Reserves (SPR), many took it as a sign of things to come.
The administration announced the delay after realizing that the offers it received were either too expensive or didn’t meet the required specifications. “Following review of the initial submission, DOE will not be making any award selections for the February delivery window,” Reuters quoted the DOE spokesperson as saying in an emailed statement.
Earlier in December, Washington announced it would purchase up to three million barrels of crude oil for February delivery. This was to be the U.S.’ first purchase in months after the release of a record 180 million barrels last year to tame the U.S. markets in a mid-term election year.
The release led to SPR crude levels going down to their lowest levels in decades. That led to U.S. President Joe Biden’s announcement that Washington would begin buying crude to fill the reserves to the required levels as soon as the prices justified the purchase.
The bids submitted by oil companies did not meet those expectations. Their rejection also seemingly meant that the DoE expects crude prices to go down further in the coming weeks and months.
China’s announcement that it was easing its Zero Covid policy did not lead to an expected rise in crude oil prices, as some of the market’s biggest names had anticipated. In fact, a significant resurgence in energy consumption remains weeks, if not months, away, according to a Bloomberg commentary.
Instead, global oil markets began the year performing much as they did at the end of 2022: oversupplied due to a combination of lacklustre demand and robust supply while simultaneously struggling with thinner trading volumes than historically has been the case.
Many agree that the DoE expectation of a further dent in crude market prices is not without cause. “To me, the market is oversupplied by at least one million barrels a day,” Bloomberg quoted Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC, as saying. “We are going to have large stock builds. In a couple of weeks, you’re going to be building 10 million barrels a week; how is the market going to handle that?”
The International Monetary Fund is now warning that a third of the global economy could be in recession in 2023. Worries over the health of the global economy, a synchronized deceleration of the economies of the U.S., Europe, and China, and its possible impact on global crude consumption continue to linger, impacting market sentiments.
DOE is not oblivious to those sentiments.
As demand uncertainty continues to hang, crude oil markets registered a large loss in the first week of trading in the year. Although it pared a one per cent loss on Thursday, for two consecutive days before that oil markets posted their most significant two-day loss for the start of a year in three decades. Finally, at the end of the week, West Texas Intermediate settled below U.S.$74 a barrel, posting the largest weekly loss in a month – over 8.1 per cent.
For the week, both Brent and WTI were down over eight per cent. This was their biggest weekly dive to start the year since 2016. For three weeks before that, both the benchmarks had registered gains of about 13 per cent.
Confirming market conditions, Saudi Arabia, the world’s top crude exporter, announced that it was lowering the price for its premium Arab light crude to Asia to its lowest level since November 2021.
Although not everyone, including CEO of Pioneer Natural Resources Scott Sheffield, agrees with the doomsday scenario, the DOE announcement to back away from any crude purchases for February is a warning sign. Markets could be in for some more adjustments, and the DOE is waiting for the right moment before finalizing its procurement deal.
By Rashid Husain Syed
Toronto-based Rashid Husain Syed is a respected energy and political analyst. Energy and the Middle East are his areas of focus. Besides writing regularly for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.